Part 6: Synthetic Covered Calls

Welcome back to the Rude Awakening, folks.

Today is Friday, February the 12th, 2021.

We are on day six of a 10-part series talking about how to build a trading platform that gives us an edge or an advantage.

Day one, we talked about the problem, which is we don’t have an edge or an advantage if we’re just simply buying stock or investing money directly into the marketplace.

Day two, we talked about the solution, which is building an asymmetric trading system, where we only risk a dollar for every $3 of potential profit.

Day three, we talked about how to use bracket orders to automate that process.

Day four, we talked about filtering and screening through the 14,000 different opportunities we have in the marketplace every day, how to find those trades out there.

Day five, yesterday, we talked about how to calculate probability of profit and win-loss ratios and really understand whether or not we do have an edge or an advantage when we go out and place a trade.

Today, we’re going to talk about synthetic covered calls and how that works in our portfolio and what it does for us. Click here to read the transcript for today’s video.

Continue reading for a brief look at today’s markets…

Once Again… Record-Setting Week in the Markets

Stocks opened slightly lower this morning, after closing yesterday’s session at NEW record highs.

Yahoo Finance reports…

Stocks fell slightly Friday morning, with equities hovering just below record levels.

Both the S&P 500 and Nasdaq ended Thursday’s regular trading day at fresh record closing highs as tech stocks outperformed. The Dow ended just a tick below its own recent record closing level. U.S. stocks tracked declines in overseas equities, after new data showed that UK gross domestic product (GDP) slumped by a record 9.9% in 2020 as a virus-induced recession swept the country.

Shares of Dow component Disney (DIS) increased about 1% after the company posted a surprise quarterly profit and grew Disney+ streaming subscribers more than expected, as the company aggressively builds out its direct-to-consumer business. Newly public company Bumble (BMBL), which began trading on the Nasdaq on Thursday, rose another 8% after jumping 63% in its public debut.

Over the past couple weeks, investors have absorbed a bevy of much stronger than expected earnings results, with corporate profits rebounding much faster than expected despite the ongoing pandemic. With more than 80% of companies now having reported fourth-quarter results, S&P 500 earnings per share (EPS) have topped estimates by 17% in aggregate, and bounced back above pre-COVID levels, according to an analysis by Credit Suisse analyst Jonathan Golub.

“Prompt and generous government action mitigated the [virus-related] damage, leading to outsized economic and earnings surprises,” Golub said. “The earnings recovery has been substantially more robust than we could have imagined when the pandemic first took hold.”

Stocks have continued to set fresh record highs against this backdrop, and as fiscal and monetary policy support remain robust. But as investors become accustomed to firming corporate performance, companies may need to top even greater expectations in order to be rewarded. This could in turn put some pressure on the broader market in the near-term, and warrant more astute assessments of individual stocks, according to some strategists.

Markets are pushing higher and higher and higher.

We KNOW a retracement MUST come.

But today is not that day.

Will it be Monday? Will it be a week or a month from now?

That we don’t know.

The good news is, as long as you’re trading with a set strategy, and you’re able to cap risk and predict your probability of profit, that’s all you need to make money in any market.

Keep following along with this series if you want to learn exactly how to do this…

Have a great rest of your trading day and an awesome long weekend.

We’ll see you Tuesday.


Scott Stewart

Scott Stewart
Editor, Rude Awakening

You May Also Be Interested In:

The Unemployment Gap

In economics, market clearing is the process by which the supply of something that is traded is equal to the demand so that there is no leftover supply. In other words, it should be close to impossible for an unfulfilled demand of something to exist while there is an ongoing surplus of that same thing. Today we explore theories that experts have about this discrepancy and explain why some are worried that labor supply issues were bubbling under the surface long before the pandemic....

Scott Stewart

Scott Stewart has been trading for decades. He has acted as an analyst and educator on the stock market for just as long. As your Rich Dad's Weekly Cash Flow analyst, Scott works tirelessly to ensure you know everything you need to do when entering into new positions, and adjusting trades as you go along....

View More By Scott Stewart